Network Centrality of Customers and Suppliers

Abstract

We explore how risks propagate through product market input-output networks by constructing degree centrality measures for customer and supplier industries. We find central supplier industries have higher market risks than central customer industries and posit that the provision of trade credit from suppliers to customers drives this risk transmission. First, we document that market risks increase with trade receivables. Second, using difference-in-differences methodology, we test and find that in the face of intensifying competition, supplier centrality increases receivable days while customer centrality increases payable days, consistent with the notion that network centrality is an important determinant of trade credit provision and usage. Using the 2007-2009 financial crisis as a liquidity shock, we show that central suppliers offer more receivables when they have more pre-crisis cash, suggesting that suppliers attempt to protect important business relations by absorbing some liquidity shocks to their customers. Overall, our results support our views that trade credit is a channel through which risks propagate from customers to suppliers and network centrality amplifies this effect, leading to an increase in aggregate volatility.

Keywords: BEA Input-Output, Network Centrality, Customer-Supplier Relationship, Systematic Risk, Trade Credit.

JEL Classification: G30, G32, L10, L12